Market Commentary

Making Cents of the Markets

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It was a mixed bag for the markets this week. The S&P 500 gained 0.2 while the TSX lost 0.7%. Driving the markets was the Federal Reserve (Fed) meeting, more corporate earnings, and a jobs number that blew past expectations. The Fed meeting on Wednesday was mostly as expected, with no rate hikes and a bias to hold steady until more information comes in. They described the low inflation readings in the U.S. as ‘transitory,’ and want to see inflation run either higher or lower consistently before moving rates one way or another. As the markets had started to price in a rate cut, they traded lower after this idea was dropped for the balance of the year. Next meeting will be in late June.

Earnings season is almost over! Over 85% of the S&P 500 has now reported, and earnings are beating on average by 6.8% with 73% of companies exceeding bottom-line estimates, according to Credit Suisse. Those beat rates have earnings-per-share (EPS) now trending well into the positive, with expectations now shifting to 2% growth overall. That’s well above the -1% EPS contraction expectations that the consensus had going into April. In addition, while the market-cap weighted growth is 2%, the median company is expected to be much better – around 5.2% EPS growth. There are still some big names to report next week, including Disney, Toyota, Anheuser-Busch, and Twenty-First Century Fox.

This week’s jobs report did not disappoint. U.S. hiring jumped in April, as employers hired a seasonally adjusted 263,000 new workers, well past expectations of 190,000, and it was the second consecutive month of a big beat. The unemployment rate also fell to 3.6%, the lowest rate in nearly 50 years. This is strong confirmation of the 3.2% annualized GDP growth for the first quarter. The U.S. economy is proving resilient, as the consumer continues to strengthen their footing. The 2019 expectations of slowing GDP growth to below 2% seem unwarranted, as it is tracking closer to 2.5% or higher for the year.

Our Strategy

We made minimal changes to the portfolios this week, with momentum still headed in the right direction. One thing holding us back from putting more cash to work is the breadth of the market weakened just after getting back to the September highs last week, and we now find ourselves just below those levels. We want to see a strong breakout above these levels on high volume to confirm a new leg up for markets.  If economic data out of the US continues to improve, and is reflected in earnings reports, then we believe markets should be higher in the second half of the year.  We would also welcome a minor correction after such an incredible run, which would give us a buying opportunity.

That said, we do expect a resolution to the trade deal between China and the U.S. soon, with some chatter that there will be a tentative deal written by end of next week. This makes sense, as upper level meetings have been taking place for months now, and delegates are set to meet in Washington on Wednesday after being in China this week (again). There are still some unknowns out there, with the Canadian Federal election coming up in October and the U.S. elections right around the corner in 2020, but we think Trump is looking for trade deals and a strong stock market to be able to tout.

For those wondering about the “sell in May and go away” mantra, we are only three days in but so far, not so good for the theory. And while it is true that seasonally, the May through October period is materially weaker than the November through April period, it’s not necessarily a negative period and we would caution against selling on this aberration. The stats can look compelling, according to Bespoke Investment Group. If you go all the way back to 1928 and only owned the index from November through April each year, you’d be up 4,662%. This compares to only 185% gain had you owned only from May through October every year. But saying “sell in May” is likely the incorrect phrasing, given that both periods give you positive returns. It should really read “hold in May and go away.” Given we’re not likely to enter a recession in the next 6 months, the year before an election year is normally the strongest of the four-year cycle, and the fundamentals are increasingly getting better, we will not be abandoning our stock positions as of now.

Chart of the Week

The U.S. unemployment rate dropped to 3.6% through April, hitting its lowest level since December 1969:

Beyond the Markets

With summer right around the corner, the list of festivals and markets in Vancouver continues to grow! Beginning today at 5:00pm, one of Vancouver’s largest markets, the Shipyards Night Market will be open to the public. Taking place every Friday until the end of September, the market will feature over 100+ vendors selling fresh food and locally-made products. In addition, head over to the Shipbuilders’ Stage for live music or for the 19+ visitors, stop by the beer garden for a taste of local beer and ciders.

Click here to learn more.

Listen to this week’s Making Cents of the Markets on CKNW. We gave listeners a market update, as well as discussed robo-advisors and what to expect from a full service financial team. Listen here.

This commentary has been prepared by Pinkowski Wealth Management. It is for informational purposes only. Raymond James Ltd. believes this information to be reliable but does not guarantee its accuracy or completeness and is not responsible for any errors or omissions. Raymond James Ltd, member Canadian Investor Protection Fund. This email may provide links to other Internet sites for the convenience of users. Raymond James Ltd. is not responsible for the availability or content of these external sites, nor does Raymond James Ltd endorse, warrant or guarantee the products, services or information described or offered at these other Internet sites. Users cannot assume that the external sites will abide by the same Privacy Policy which Raymond James Ltd adheres to.